Thursday, April 7, 2011

Friday Dollar Analysis

The multi-year chart shows the dollar in a clear consolidation pattern. On the top, prices are contained by a downward sloping line while prices on the bottom are contained by prices near the $22/level (which they have moved through). After a long-consolidation, the move lower will should be prolonged as traders have had some time to amass their respective positions.

In the last year, notice the clear down/up/down or lower low, lower high pattern prices have moved in. The EMAs have also been providing upside resistance. Also note the 200 day EMA is moving lower, indicating the longer-term trend is down.

The EMA/price picture is extremely bearish -- all the EMAs are moving lower, the shorter are below the longer and prices are below the EMAs. This is the most bearish orientation possible for a chart.

Although the US economy is growing, which is usually bullish for a currency, there are other factors weighing negatively on the dollar.

1.) The large amount of debt the US is issuing is leading traders to question the longer term vitality of the US market (although the bond market is still printing very low interest rates, indicating they disagree with this for now).

2.) Other countries have must more attractive interest rate structures. The EU has just raised rates, as have other Asian countries. Australia was one of the first countries to start raising rates after the recession, and Brazil's rates are some of the highest in the world. In short, US rates are very low and therefore unattractive from a longer-term perspective.

3.) There are continuing signs of a possible slowdown in the US economy: durable goods orders are stalling and gas prices are very high.

Right now, the dollar is in a confirmed downtrend. There is little reason to thing it will reverse course anytime soon, especially as the EU has started to raise rates before the Federal Reserve.